Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-22T06:51:47.488Z Has data issue: false hasContentIssue false
  • English
  • Français

Trading Volume in Dealer Markets

Published online by Cambridge University Press:  21 September 2010

Katya Malinova  and
Andreas Park
Katya Malinova
Affiliation:
Department of Economics University of Toronto, 150 St. George Street, Toronto, M5S 3G7, ON, Canada. [email protected]
Andreas Park
Affiliation:
Department of Economics University of Toronto, 150 St. George Street, Toronto, M5S 3G7, ON, Canada. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop a financial market trading model in the tradition of Glosten and Milgrom (1985) that allows us to incorporate nontrivial volume. We observe that in this model price volatility is positively related to the trading volume and to the absolute value of the net order flow (i.e., the order imbalance). Moreover, higher volume leads to higher order imbalances. These findings are consistent with well-established empirical findings. Our model further predicts that higher trader participation and systematic improvements in the quality of traders’ information lead to higher volume, larger order imbalances, lower market depth, shorter duration, and higher price volatility.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 6 , December 2010 , pp. 1447 - 1484
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1988), 3–40.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Brown, P.; Walsh, D.; and Yuen, A.. “The Interaction between Order Imbalance and Stock Price.” Pacific-Basin Finance Journal, 5 (1997), 539–557.CrossRefGoogle Scholar
Chan, K., and Fong, W. M.. “Trade Size, Order Imbalance, and the Volatility-Volume Relation.” Journal of Financial Economics, 57 (2000), 247–273.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Order Imbalance, Liquidity, and Market Returns.” Journal of Financial Economics, 65 (2002), 111–130.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity.” Journal of Financial Economics, forthcoming (2010).Google Scholar
Easley, D., and O’Hara, M.. “Time and the Process of Security Price Adjustment.” Journal of Finance, 47 (1992), 577–605.CrossRefGoogle Scholar
Engle, R. F., and Russell, J. R.. “Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data.” Econometrica, 66 (1998), 1127–1162.CrossRefGoogle Scholar
Foster, F. D., and Viswanathan, S.. “Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models.” Journal of Finance, 48 (1993), 187–211.CrossRefGoogle Scholar
Foucault, T.; Kadan, O.; and Kandel, E.. “Limit Order Book as a Market for Liquidity.” Review of Financial Studies, 18 (2005), 1171–1217.CrossRefGoogle Scholar
Gallant, A. R.; Rossi, P. E.; and Tauchen, G.. “Stock Prices and Volume.” Review of Financial Studies, 5 (1992), 199–242.CrossRefGoogle Scholar
Glosten, L. R., and Milgrom, P. R.. “Bid, Ask and Transaction Prices in a Specialist Market with Heterogenously Informed Traders.” Journal of Financial Economics, 14 (1985), 71–100.CrossRefGoogle Scholar
Grossman, S. “On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information.” Journal of Finance, 31 (1976), 573–585.CrossRefGoogle Scholar
Hasbrouck, J., and Ho, T. S. Y.. “Order Arrival, Quote Behavior, and the Return-Generating Process.” Journal of Finance, 42 (1987), 1035–1048.Google Scholar
Jones, C. M.; Kaul, G.; and Lipson, M. L.. “Transactions, Volume and Volatility.” Review of Financial Studies, 7 (1994), 631–651.CrossRefGoogle Scholar
Karpoff, J. M. “The Relation between Price Changes and Trading Volume: A Survey.” Journal of Financial and Quantitative Analysis, 22 (1987), 109–126.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
Lesmond, D. A.; Ogden, J. P.; and Trzcinka, C. A.. “A New Estimate of Transaction Costs.” Review of Financial Studies, 12 (1999), 1113–1141.CrossRefGoogle Scholar
Milgrom, P., and Stokey, N.. “Information, Trade and Common Knowledge.” Journal of Economic Theory, 26 (1982), 17–27.CrossRefGoogle Scholar
Smith, L., and Sorensen, P. N.. “Rational Social Learning with Random Sampling.” Working Paper, University of Michigan (2008).CrossRefGoogle Scholar
Wang, J. “A Model of Competitive Stock Trading Volume.” Journal of Political Economy, 102 (1994), 127–168.CrossRefGoogle Scholar